Raise the Roof: Debt Crisis Averted, But Debate Far From Over

August 2, 2011 at 12:00 AM EDT

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The Senate passed a bipartisan agreement to raise the U.S. debt ceiling and cut spending Tuesday. President Obama quickly signed the deal, but it couldn't stop a sell-off on Wall Street. Jeffrey Brown discusses the compromise bill with University of California, Berkeley's Robert Reich and Stanford University's John Taylor.

TRANSCRIPT

JUDY WOODRUFF: The U.S. Senate gave final approval today to an agreement both to raise the ceiling on the government’s debt and to cut spending, a deal the president quickly signed. The actions staved off a default, but left lingering questions about the nation’s future credit rating.

KWAME HOLMAN: The Senate vote came less than 12 hours before the government’s borrowing authority would have expired, leaving federal bills unpaid. In the end, the measure cleared the chamber with broad bipartisan support, 74-26, and President Obama quickly signed it.

He spoke at the White House just after the Senate result was finalized.

PRESIDENT BARACK OBAMA: This compromise guarantees more than $2 trillion in deficit reduction. It’s an important first step to ensuring that, as a nation, we live within our means.

KWAME HOLMAN: Those savings are to be achieved over the next decade in two stages. The debt ceiling will be raised by a similar amount, also in two stages, allowing the government to continue borrowing into 2013.

The plan relies heavily on a joint congressional committee to recommend $1.5 trillion of the total savings. Congress must approve the recommendations by year’s end, or automatic spending cuts will kick in. That scenario makes likely a renewed fight this fall over spending cuts vs. tax increases.

Senate Majority Leader Harry Reid spoke for many Democrats today.

SEN. HARRY REID, D-Nev. majority leader: The only way we can arrive at a fair arrangement for the American people with this joint committee is to have equal sharing. It’s going to be painful. Each party, if they do the right thing, it’s going to be painful for them, because, to be fair, we have to move forward. There has to be equal spending cuts. There has to be some revenue that matches that.

KWAME HOLMAN: But Senate GOP Leader Mitch McConnell gave no indication that his side will give ground on tax hikes.

SEN. MITCH MCCONNELL, R-Ky. minority leader: Much work remains, and, to that end, our first step will be to make sure that Republicans who sit on the powerful cost-cutting committee are serious people who put the best interests of the American people and the principles that we have fought for throughout this debate first.

KWAME HOLMAN: The president, meanwhile, looked to quickly put the debt debate behind him and turn attention to job creation.

BARACK OBAMA: While Washington has been absorbed in this debate about deficits, people across the country are asking, What can we do to help the father looking for work? What are we going to do for the single mom who’s seen her hours cut back at the hospital? What are we going to do to make it easier for businesses to put up that “now hiring” sign?

KWAME HOLMAN: While the president and lawmakers managed to avoid default, neither side appears to have escaped blame for a messy process. A new Washington Post/Pew Research Center poll found 37 percent of Americans hold a less favorable view of President Obama in the wake of the debt fight, and 42 percent said their impression of congressional Republicans has worsened.

Beyond public opinion, there also were signs of economic fallout from coming so close to the debt limit deadline. Treasury Secretary Timothy Geithner told ABC News he can’t be certain there will be no downgrade of the country’s credit rating.

TIMOTHY GEITHNER, U.S. Treasury secretary: I can’t — it’s not my judgment to make. And they have to make that judgment, but this is a — in some ways a judgment on the capacity of Congress to act. And what this deal does is put us in a much better position to make those tough choices.

KWAME HOLMAN: Already, there have been rumblings from major bond rating agencies that the debt deal by itself is not enough. One of them, Fitch Ratings, warned today it may lower its assessment of U.S. creditworthiness by the end of August.

JEFFREY BROWN: The day’s action in Washington could not stop a sell-off on Wall Street. Stocks plunged again, as they have for more than week, and the market gave up all its gains for the year amid mounting fears that the economy is stalling again.

The Dow Jones industrial average lost nearly 266 points to close at 11,866. The Nasdaq fell 75 points to close at 2,669.

You think this debt and deficit deal is bad for the economy. Is it in both the short and long terms? Explain.

ROBERT REICH, former U.S. Labor secretary: Well, Jeff, it’s good for the economy in terms of staving off a kind of a crisis that we almost faced with regard to a default on the full faith and credit of the United States.

But it’s not terribly good for the economy overall, because it really does tie the president’s hands in terms of a jobs bill that would stimulate jobs growth and fulfill kind of the mission of the government, when, in fact, consumers and businesses are not able or willing to buy or to sell.

And that’s the case now. The reason, I think, of the sell-off on Wall Street today, the great stock decline, is because a lot of companies now realize that there is just going to be insufficient aggregate demand for all the goods and services that need to be sold.

JEFFREY BROWN: Well, John Taylor — we will engage on some of these.

John Taylor, first, start — starting point, what do you see as the impact on the economy of the deal?

JOHN TAYLOR, Hoover Institution: I think it will turn out to be quite positive.

People have been very concerned about the exploding debt, the big increase in government spending over the last several years. And this shows the government is able to deal with that. The spending reductions that go along with this deal are very important. They’re a step in the right direction. And I think that’s what the economy needs.

It’s not going to occur overnight. And there is a lot more work to do, but I think it’s — it should be viewed as an accomplishment, and actually showing that — the power of people who really want to deal with this debt and deficit problem.

JEFFREY BROWN: And what do you think about the stock market falling last — all the last week and sharply today? Because I think it confuses people on a day when there was a deal.

JOHN TAYLOR: Well, the deal was, of course, known over the weekend, but what I would say is happening here, this recovery is very, very weak.

And we’re just seeing more and more evidence of that. This morning, we got news about consumption in last month, and that’s all negative, quite frankly. This recovery is one of the worst we have had in history from such a deep recession. So the problem is not just right now. It’s this whole recovery. That’s why I think these kinds of actions in Washington, where they’re actually doing something, not as much as they need to do, but doing something, will be quite positive.

JEFFREY BROWN: Well, let’s back up a bit here.

Robert Reich, you first. What is the — what is the principal economic problem of the country now? We have — we have spent weeks and weeks talking about debt. The president, we just heard, says now it’s time to get back to talking about employment.

What’s the principal problem?

ROBERT REICH: Well, the principal problem is not debt. The principal problem is jobs and lack of growth.

Now, long term — that is, 10 years from now or seven years from now — yes, if we don’t do anything about our mounting deficits, there will be a severe deficit and debt problem. I think Professor Taylor is absolutely right. The country does need to focus on that.

But, in the short term, there is no question that the number-one priority is to get jobs back and to stimulate the economy, to boost aggregate demand. If consumers, again — and I want to — I want to kind of explore this because I’m interested in Professor Taylor’s response.

If you have such a shortfall in demand, if consumers, who comprise 70 percent of the economy, are under a huge debt, they’re scared of losing their jobs, their houses have declined 30 percent, 33 percent from what they were in 2006, they are not going to spend. They are not spending. There has been a huge drop in consumer spending.

Businesses are not going to create jobs without customers out there to buy the goods and services that consumers — that businesses can provide. And so government, over the last eight recessions, if you count the Great Depression and the spending on World War II — that’s nine instances — government fiscal policy to stimulate the economy in the short term with jobs programs, a new, for example, WPA, Civilian Conservation Corps, all kinds of things that actually generate directly or indirectly jobs, is the only thing we have to stimulate demand right now.

JEFFREY BROWN: Well, John Taylor, go ahead, because this is what we hear from a lot of economists. This is exactly the wrong time to be reducing government spending. What’s your response?

JOHN TAYLOR: You know, we have had a gigantic increase in government spending over the last three years, from 19.5 percent of GDP to over 24 percent of GDP. That is not the answer. That has been tried and it has not worked.

In fact, I would say, if you go back to previous periods where you tried these things, in the ’70s, it also didn’t work. We had bad economic times. That’s why I think it’s so important to get business investing to hiring people. That will create the jobs. And by getting our fiscal house in order, number one, but also making changes on regulatory policy and monetary policy, we will be able to create a — create a pro-growth environment, which will reduce this — reduce this high unemployment rate and make the economy generally better off.

JEFFREY BROWN: So, Robert Reich, is there a way to reconcile these two approaches?

ROBERT REICH: Well, truth is not halfway between right and wrong.

(LAUGHTER)

ROBERT REICH: I mean, I do — I do respect, though, Professor Taylor.

JEFFREY BROWN: I’m going to use that quote every night, I think. That’s good.

(LAUGHTER)

ROBERT REICH: But, look, we tried in — really, in the shadow, in the gravitational pull of a huge depression in 1936-1937, Franklin D. Roosevelt did pull the reins back, cut spending, and we found ourselves plunged back into the Great Depression.

I mean, it is true, and Professor Taylor is right, we need regulatory reform. We need predictability. Those are all important. But we need aggregate demand. We need jobs. And if the government is — has its hands tied behind itself because of this new deal, this new deficit deal, and if consumers, as they have shown, are scared to death, they’re not spending, with good reason, rationally, for individual consumers and families, and businesses will not expand unless there are customers out there, not because — it’s not a matter of stability.

It’s not a matter of business environment. It’s not a matter of taxes. They will not create jobs unless they have customers. This is just — this isn’t rocket science. And, therefore, government has got to spend more now.

JEFFREY BROWN: John Taylor, what about this so-called super…

JOHN TAYLOR: It’s just — I have to say…

JEFFREY BROWN: Go ahead. Oh, go ahead.

JOHN TAYLOR: … it’s just the opposite.

Government has spent a lot more. The facts are very clear. You just look at the numbers. And even with this budget deal, they’re going to spend a lot more. And so it’s so important at this point to change the environment. Businesses are sitting on lots of cash. They’re concerned about the future.

They’re not investing. And they’re not hiring people. That’s why the unemployment rate is so distressingly high and why this recovery, for the last two years, has really been one of the worst, especially given the weak economy during the recession that we have had. So this is an approach which we have go towards. It worked in the past. And I hope it works this time.

JEFFREY BROWN: Does the deal start to turn things around? You said it’s not — doesn’t happen overnight. When a deal like this…

JOHN TAYLOR: It doesn’t.

JEFFREY BROWN: … you think is a positive, but what has to happen next?

JOHN TAYLOR: It doesn’t, because there is a lot more to do in terms of spending. This brings spending down to maybe 22 percent of GDP from the increase. So there is still more to go on the spending side.

Plus, there are these other things to do, like Professor Reich mentioned, the regulatory reforms, pulling back from the restrictions that firms are operating under. And I think a more predictable monetary environment, international trade environment, would help, too. There are lots of things to do. It’s a big job. And that’s why I’m and many of you are focusing on it so much.

JEFFREY BROWN: All right, Robert Reich, just a brief response, 30 seconds, if you would.

ROBERT REICH: Well, let me just say that, undoubtedly, Professor Taylor is correct. This is the weakest recovery on record.

But part of that weakness is that the stimulus wasn’t big enough. The drop in aggregate demand from consumers, who are naturally overburdened and scared, was much larger than anybody anticipated, anybody knew, anything that we have experienced since the Great Depression.

And so we needed and still do need a larger boost in terms of total aggregate spending.

JEFFREY BROWN: All right, Robert Reich, John Taylor, thank you both very much.

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